If then, there is no inherent moral right to establish a preference of the note holding creditors of an insolvent bank as against the deposit holding creditors, in the distribution of the assets of an insolvent bank, the question arises, does public opinion demand, in the interest of the common good, that such a preference should be given in order to establish a bank-note system which will give banks such a profit, that to secure it they will relieve the United States Treasury of the burden of gold redemption, and afford the country a circulating medium having alleged advantage over that now in use.
First. As a fundamental proposition, any bank-note system depending for security upon the commercial assets of banks, and sanctioned by government, should be inherently fair in its relation to the deposit holding creditors and the note holding creditors of an insolvent bank.
Second. No system is inherently fair which creates a preference of the note holder over the deposit holder in the distribution of the assets of an insolvent bank.
Third. In none of the older countries, to the success of whose uncovered note systems we are referred as tending to justify the experiment in this country, is the note-holder by the law preferred over the deposit holder, in case of insolvency of banks of issue. Canada, with its thirty-eight central banks of issue, as compared with thirty-six hundred scattered national banks in this country, furnishes the only exception to this rule.
Fourth. The necessity of the preference under any such system in this country, to give security and credit to the notes, demonstrates that it is the depositors of the country and not the banks upon whom the great weight of the guarantee of the note issues must fall.
Fifth. A fairer system would provide that, when a receiver took charge of an insolvent bank, he should not first pay into the general redemption fund held by the Government, an amount derived from the assets of the bank sufficient to pay the note holders in full before paying anything to depositors, but he should pay into the fund that pro rata share of the proceeds derived from the assets, which should go to the note holders, not as preferred creditors, but as creditors in the same class as depositors.
Sixth. If under such a system, owing to causes to which we have referred, the tax upon the solvent banks would be so large as to render the issue of such currency unprofitable and unattractive to the banks, it would be a demonstration of the radical difference in the environment and condition of our banking system as compared with the more centralized and older systems of Europe. It would be a demonstration of the fact that, under the proposed legislation, while the banks would take the profits upon the circulation, the depositors would take the bulk of the losses.
Seventh. Such a system of uncovered notes as this proposed, providing for a preference of the note holders over other creditors, would interfere radically with the more important functions of national banks, to which the note-issuing function is secondary and subordinate.
Eighth. The Government of the United States is not in such straits, in connection with its present currency system, as to compel it to enter into a plan of currency changes, by which it in effect sells extended and valuable currency privileges to the national banks of the country, in exchange for assistance from them in meeting its present governmental currency obligations payable in gold.
Ninth. If the present conditions of governmental currency demand reforms to secure which will entail cost, it is better for the Government, as the representative of all the people, and under all circumstances connected with our banking system, to pay an ascertained and exact cost direct, than to endeavor to evade it by granting extensive currency privileges to banks, which of necessity must reimburse themselves from the community and the depositor class for any cost which they incur in assuming the burden of gold redemption, or maintaining the credit of their notes.
Currency Legislation Suggested,
All writers on the subject of our bond-secured banknote circulation have agreed on this one fact, and it is about the only one they did agree upon, that the most serious defect in the system was its inelasticity and consequent inability to automatically expand in times of enforced liquidation due to commercial and bank panics. As a means of correcting this defect, Mr. Dawes recommended the following amendments to the laws governing the issue of national bank notes:
First. The existing bank-note system, based upon deposit of Government bonds as security, should not now be abandoned.
Second. For the purpose of allowing elasticity to banknote issues to protect the banks and the community in time of panic, a small amount of uncovered notes, in addition to the secured notes, should be authorized by law under the following limitations: They should be subjected to so heavy a tax that they could not be issued in normal times for the purpose of profit, but would be available in times of emergency. The tax should be so large upon the solvent issuing banks as to provide a fund which, in connection with the pro rata share of the assets of an insolvent bank, would be sufficient to redeem the notes in full, without necessitating any preference of note holders over depositors of any insolvent issuing bank. The tax should be so large as to force this currency into retirement as soon as the . emergency passes.
Such a currency could be used only to lessen the evil effects of the too rapid liquidation of credits which are collapsing under a financial panic, but could not be profitably used as a basis of business speculation and inflation. It should be to the business community what the clearing house certificates are to our cities in times of panic - a remedy for an emergency, not an instrument of currency business.
The Act of May 30, 1908, known as "The Emergency Currency Law," practically incorporated in its provisions the foregoing views expressed by Mr. Dawes, by providing for additional •circulation at a higher rate of taxation, in times of emergency, to be issued through Currency Associations or by individual banks upon the security of their assets having circulation outstanding secured by United States bonds of not less than forty per cent. of their capital stock.